Fondul Proprietatea SA (FP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fondul Proprietatea Third Quarter 2023 Results Conference Call. Today's conference is being recorded [Operator Instructions] Thank you. And I will now turn the conference over to Marius Dan, Deputy CEO, Corporate Strategy. You may begin.

Thank you very much. Good afternoon, and welcome, everybody, to our conference call to discuss the third quarter 2023 results and the October 2023 net asset value developments. Johan Meyer, CEO of Romania and Portfolio Manager; Catalin Cadaru, Financial Reporting Manager; and myself are pleased to host today's call. The third quarter 2023 results report can be found on the Fondul's website in the Financial Results section. And the presentation that we will be discussing is also available on our website at www.fondulproprietatea.ro in the Investor Relations Call section. After the presentation, we will have a 30-minute Q&A session. That being the agenda. I'd like to invite Johan to comment. I'll start with the presentation with Slide 2, where we highlight the key facts about Funds. At the end of October 2023, the Fund's net asset value was RON 3.38 billion or $720 million, and the NAV per share has reached RON 0.6457 or $0.1386. On the right-hand side, you can also see the evolution of the Fund adjusted share price and the discount premium since the Fund's listing in January 2011. As of yesterday's close, the Fund was trading at a discount of 15.93% for the shares and slightly higher for the GDRs at 18.78%. On Slide 3, we present the Fund's shareholder structure as of the 31st of October. There are no significant changes in the shareholder structure since our last conference call, neither on the list of the largest shareholders nor the major categories. One thing to emphasize, though, is the fact that the number of shareholders has increased to 22,602. Moving forward to Slide 4 of the presentation, we show a summary of the NAV, share price and GDR performance since 2011 and the evolution of the Fund's average annual discount on the Bucharest Stock Exchange and the London Stock Exchange. The NAV total return for the first 9 months of this year was negative 5%, total return for the local shares was a positive 16.5%, while the total return for the GDR was 2.7%. For the first 10 months of the year, the NAV total return was 4.6% down. Total return for the local shares was an increase of 35.9%, while the total return for the GDRs was 23%. This performance was influenced by the adjustment with significant distribution on the back of the Hidroelectrica IPO, the cash distribution of RON 1.72 per share. Moving on to Slide 5. We've shown the contributors to the Fund's NAV performance for the third quarter. No significant change this year. And if we look at the 9-month period, we can see that the largest changes -- the largest contributors to the performance of the NAV were Bucharest Airport with a change in the NAV per share of 16.1%, Salrom with 8.6%, Engie with 11.3%, and then Distribution Montanesa with 22% almost and Constanta Port. Whereas the bottom performance were Alro, Romaero and of course, Hidroelectrica which was completely sold during the third quarter of this year. Moving on to the portfolio. I would like to invite Johan now to comment. Johan?

Thanks, Marius. Yes. On Slide 8, we showed portfolio structure at the end of October, 60% in unlisted companies, 4.6% in listed equities and the remainder in cash and receivables. At the end of the month, it was $260 million. On Slide 9, we present main portfolio companies also as of the end of October, which represents 60.6% of the Fund's net asset value. Moving on to Slide 10. We show the main outcomes of the Hidroelectrica IPO, the transaction details and the key highlights as well as the time line. So following the IPO and the exercise of the Alro adoption, the Fund sold its entire stake of 19.94% in Hidro, which was backed by strong local and international long-only demand. The book was multiple times oversubscribed throughout the price range, therefore, allowing us to price the deal at the upper half of the range at RON 104 per share. And as shown on Slide 11, the EUR 1.9 billion IPO makes it the largest in Romania ever, also the third largest in the history on Central Eastern European Exchange and the largest in Europe in 2023 year-to-date. Moving on to Slide 12. We present the update for Bucharest Airport. Pleasing development here. The traffic has recovered to pre-COVID levels in the first 9 months of '23, increasing by 18% year-on-year, reaching 11.1 million passengers. And this was the main driver for the increased operating profits, which was up 32% year-on-year to RON 420 million. On the corporate governance front, all the Board members have interim mandates and the selection process has started, and we expect it to be finalized in the next few months. Moving on to Slide 13. Constanta Ports. Traffic reached 65. 9 million tons in the first 9 months, an increase of 15.5% year-on-year on the back of cereals and oilseeds linked to traffic being diverted from Ukraine. Overall, traffic of merchandise in relation with Ukraine increased 2.6x year-on-year to 17.4 million tons. The increased traffic drove 9% year-on-year improvement in operating profitability to RON 180 million. Also on corporate governance, the Board has interim mandate. And in this case, the selection process of full mandates have not yet started. Moving on to Slide 14, Salrom corporate governance. We kicked off here in January '23, shareholders approved the relaunch of the selection process for the Board members based on Ordinance 109 of 2011, with selection procedure being conducted at the level of the Ministry of Economy. Currently, no surprises. All Board members have interim mandate. Regarding the company's IPO. The Fund continues to engage with the majority shareholder and the company in relation to preparations for a potential IPO in the context of protracted process for the company's -- for the appointment of the company's directors under the corporate governance rules applicable to state owned entities. Now moving on to Slide 15. We also present some updates on Enel. So on October 26, '23, the sale of the Fund's entire holding in the Enel Group subsidiaries was finalized. The transaction was completed following the closing of the agreement between Enel SPA and the Greek company, Public Power Corporation S.A. for the sale of all the equity stakes held by the Enel Group in Romania. Following the transaction, the Fund no longer holds any shares in any of the Enel companies in Romania. The Fund received gross proceeds of RON 650 million following the completion of the transaction, and this will be used in accordance with the discount control methodology techniques to set up an investment policy statement. Moving on to Slide 16, we show the key financials for Fund's large holdings, also including the 2022 figures as approved by shareholders. Moving to corporate actions, I'd pass back to Marius.

Thank you, Johan. Looking at Slide 18, this is where we outlined the Fund distribution since we started managing the Fund. The 2023 amounts are the current estimations we've made based on the buybacks that have been executed so far, the finalized and the ongoing tender offers as well as the dividend distributions approved by the shareholders during the April Annual Shareholder Meeting and the August Shareholder Meeting as well as the paid shares, excluding the treasury shares as of the end of October. Please note that the daily execution of the 14th buyback program, which started on the 3rd of January is currently suspended now due to the ongoing tender offer process. This year marks a record year for the distributions that have been made by Fondul Proprietatea then by us. The total amount just for 2023 has reached RON 11.27 billion. And the total distribution since we have been managing the Fund have increased to RON 28.5 billion, for a total of $6.9 billion. Moving to Slide 19 for the latest updates on the buyback program. This year, the 14th buyback program is, by far, the largest one in the history of the Fund, the 3.5 billion shares, which is equivalent to 56.3% of the outstanding shares at the beginning of this year. And due to the ongoing tender offer process where we're looking to repurchase 1.67 billion shares. It looks like we will end the year with a record amount of shares that have been repurchased by the Fund. The details of the 12th tender offer are included on Slide 20. As I mentioned, the size of the tender is 1.67 billion shares. The purchase price is RON 0.6319 per share and the dollar equivalent of RON 31.5950 per share -- per GDR. And this was at NAV when we announced -- at the prevailing NAV when we announced the tender offer, which was the end of August NAV. The subscription period has started on the 31st of October, and the tender will last -- the subscription period will last until the 5th of December. As always, the allocation will be pro rata. As a reminder, the consortium, which is handling the tender offer is composed of Swiss Capital an intermediary and Swiss Capital and Auerbach Grayson as the dealer managers as well as the Bank of New York Mellon as the GDR tender agent. On Slide 21, we include details on the Fund's annual net dividend and the dividend payout ratios for the largest -- for the current largest portfolio companies based on the figures that have been approved by the shareholders, the total amount for the top holdings is approximately RON 93 million for the dividends, which have been declared for the financial year 2022. On the following slides, we included the updates from the September 25, 2023, shareholder meeting. During the ordinary meeting, we had the appointment for a 3-year period of two members in the Board of nominees, Mrs. Ilinca von Derenthall and Mr. Ciprian Ladunca. They've extended their mandates. Then moving to Slide 23. Also in the ordinary meeting, we had the approval of the renewal of the mandate of Franklin Templeton as sole Director of Fondul Proprietatea for a period of 1 year, starting with April 1, 2024, ending on March 31, 2025. This was an item that was added on the agenda at the request of the shareholder of the Ministry of Finance, and it was approved by shareholders. Also saying the approval of a launch of a transparent and competitive selection procedure for the appointment of a new sole director for a mandate not exceeding 4 years, and the Board of Nominee is entitled to initiate and to organize a transparent selection procedure for a fund manager and also establishing objectives and performance criteria as well as remuneration conditions for that mandate. Then moving on to Slide 25. We include the calendar of events where we will participate and where we hope to see as many of you as possible. That being said, I would like to turn it over to Catalin Cadaru, Head of Financial Reporting, to comment on the Fund's financial results.

Thank you, Marius. On Slide 27, you can see the statement of financial position. And as previously discussed, the main event during the quarter was the completion of Hidroelectrica IPO that led to a significant decrease in the equity portfolio, including the portion that was previously classified as noncurrent assets held for sale. The remaining balance of the noncurrent assets held for sale includes the 5 Enel Group holding that -- for which the transaction was completed during October. The shareholders of Fondul Group, a special dividend during the GSM on 18th of August, and the payment started on the 29th of September. The significant increase in the cash and current accounting positions due to the dividends not yet collected by the shareholders at the end of the reporting period. This amount sit with the distribution account [ opening ] the Fund's custodian and can be collected by shareholders for a period of 3 years. The corresponding liability is included in the payables captioned in the statement of financial position. The other liabilities position, mainly includes the special dividend related to withholding liability, that Fondul will be paying in Q4. And the corresponding cash was invested in short-term instruments, such as deposits and government bonds. Moving on to Slide 28. We can see the results for the period. The net loss for the 9 months of the period ended 30th of September was RON 969 million compared with a net profit of RON 3.5 billion recorded during the same period in 2022. The loss was mainly determined by the realized at fair value related to Hidroelectrica, as the IPO price was lower compared to the valuation book was December 31, 2022 NAV, approximately RON 1.9 billion fair value loss. The proceeds collected by Fondul from the IPO and invested in short-term instruments, for the period after the special dividend payment. And this instrument generated a significant increase in the interest income captured for the period. The increase in the administration fee relates also to the distribution that we mentioned earlier. While the operating expenses include Hidroelectrica IPO related cost in the amount of approximately RON 243 million, bank fees, legal counsel and other advisers. These costs were incurred and paid during the quarter. On Slide 29, you can see an update on the minimum corporate tax. This is a development that will impact some of the portfolio holdings. Based on our current estimates, this will not impact Fondul,and you can see further details in the report that was published earlier this morning.

Thank you, Catalin. At this point, we would like to open it up for any questions that you have.

[Operator Instructions] And we do have a question on the phone. We have a question from Iuliana Ciopraga with Wood & Company.

I have a number of questions, actually. So first, I was trying to figure out exactly how much cash you'd be left with after the tender offer? And I'm looking actually not at the 9 months, but I'm looking at the October NAV, which you just published. So for a bit of clarity here, what's the other assets, the RON 127 million other assets and also the financial liabilities at amortized costs at RON 812 million? What are these?

The other assets captioned the 9 position, the RON 127 million is the warranty deposit for the initial size of the offer because the increase was paid during November. And yes, the financial liabilities at amortized cost mainly include liabilities to shareholders for the outstanding dividend, not collected. And also at least for franking that was paid during November.

Okay. So in order to assess the cash position after a tender offer, it would be right to look at a net cash...

With a caveat that we should consider this RON 127 million when determining the amount of the settlement, which is included in other assets.

Yes. So, I shouldn't do it under the net cash, right? That's what you mean?

Yes, yes, yes.

Sure. Sure. Okay. And one more regarding Bucharest Airport. Any -- what sort of payout -- dividend payout should we expect from Bucharest Airport? It used to be 90% [indiscernible] 50%. What's the [indiscernible] going forward from Bucharest Airport?

Iuliana, we don't have a formal indication yet. But I think, given the return to profitability, I would assume 50% and hope for more.

So you'd assume 50% -- any news on the new terminal? Because I guess this is what could change -- what could keep the line towards 90% if they decide to postpone the new terminal [indiscernible], right?

Nothing that is going to influence the payments or the payment of dividends in this year. So certainly, this is a topic that is very close to our hearts. And I think there is a couple of things that we're working on in order to advance the discussion. But at the moment, yes, as I said, I wouldn't worry about the ability of the company to pay dividends in this context.

But you'd rather incline for 50%? I mean your [indiscernible] I'm not sure I understood. So I mean between 50% and 90%, that's quite a different. In principle, they used to pay 90%. Is there any reason why they would pay 50% right now given their cash position?

So the 50% is obviously the legislative minimum. So we'll push for more. So for the purpose of the assumptions, I would expect no less than 50%.

Okay.

We hope, Iuliana, that given the recent fiscal measures announced by the government and -- especially the increase in the pensions next year, we do hope that we will see a continuation of this practice of requesting 90% payout ratio from the state-owned companies. But it is too early in the year. And as Johan said, the fiscal minimum is 50%. We will see what the government decides to do in order to extract more cash for the state budget.

And regarding the lawsuits we got on the [indiscernible]. Any news there?

If I may respond to this question. There is no particular news on that. As you may well know, our reports, the latest was that the first instance, our challenge was, we're rejected, but we built that and the next -- the first hearing in the [ FDO ] is in December. However, we've not envisaged a resolution that early because we have also initiated other news to challenge this and expect the appeal process to be delayed. You will, of course, the shareholders -- all shareholders will be notified on any information becomes available to our current reports. But as of now, this is the status.

Thank you. And for reference, that there was [indiscernible] report to legal.

And one more -- the last question for me. What happens with the selection of a new manager? And when would that process start? Because the decision of the latest GMS were a bit unclear, because they say that a new manager would be appointed starting -- could be appointed starting April 1, 2024. It's a bit weird. You were selected for 1 year, but then a new manager would be selected as well on a main date starting April 1, 2024. Any news there? What is happening with that process actually?

This is a question for the Board of Nominees. To be honest, I would not like to speak on the behalf. As you may well know, the shareholders mandated the Board of Nominees to deal with the selection process. And obviously, if there's any relevant information on the process, that will be also shared with shareholders. But for now, there's nothing much that we can see as managerial.

It's Johan, just to add to [indiscernible] comments. So there will be another shareholder meeting for the approval of commercial terms and the specific terms for the 1-year mandate up until March 2025. So we expect that earlier in the year.

And there are no further phone questions at this time.

It looks like we don't have any additional questions online either. So we would like to thank again everyone for your time today. And if you have any further questions, please do reach out to us. Have a good afternoon. Thanks, everyone.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.